Dixons, Carphone Warehouse merge into $20 billion 'Internet of Things retailer'

The world’s first £12 billion ($20.2 billion) Internet of Things retailer?

That’s the bold claim being made by European firms Dixons Retail and Carphone Warehouse as they announce a £3.7 billion merger that’s aimed at making the combined entity the enabler of the connected consumer world.

Some background. Carphone Warehouse was founded in 1989 and has around 2,000 stores including more than 800 in the UK. Dixons was founded in the 1930s and has 943 stores in seven countries, including more than 500 in the UK. As a merged entity, the two companies would have annual sales of more than £12 billion.

Sir Charles Dunstone, Chairman of Carphone Warehouse argues that the deal is about creating an organization that is relevant for the future:

“Connectivity is at the heart of everything that we do. Twenty five years ago, Carphone Warehouse and Dixons really were in completely different worlds. Now everything is driven by connectivity. Connectivity is like electricity. When people first put electricity into a house you maybe had a light and a fridge and that’s all that people could think of for having electricity.

“Now the innovation of people who build devices that rely on connectivity is absolutely extraordinary. Soon, everything we have will be talking to other things. We are going to live in a completely connected world. Someone needs to solve the problem of how to sell and support these devices.”

Sebastian James, chief executive of consumer electrical retailer Dixons, adds:

"The ability to take what we have built in electrical retailing and add the profound expertise of Carphone Warehouse in connectivity would make us a leading force in retailing for a connected world.

“In 2013, the number of connected electrical devices this year overtook the number of people on the planet for the first time. The number of connected devices in the home will move from four to 20 over the next 2 or 3 years. Globally 75 billion connected devices will be sold over the next 3 to 4 years.

"These are remarkable numbers. What’s clear is that the notion of an unconnected device is becoming irrelevant and the notion of a device without connectivity is also becoming more and more irrelevant."

James will be chief executive at the new group, to be known as Dixons Carphone, which joins two companies with combined sales of £12 billion, employing more than 43,000 people across Europe.

Expedient?

Leaving the IoT rhetoric to one side, there’s clearly a hugely defensive strategy at play here. Both companies have come under pressure from pure-play online competitors in their respective markets.

So although Andrew Harrison, Carphone’s chief exec, insists that the merger is an attempt to be ahead of the curve, there’s a sense that it’s a reactive as much a proactive move.

That may well be entirely sensible. If both firms are under pressure, then taking action at this point is wise. Certainly the announcement this morning placed great emphasis on the cost savings that would result from the merger - at least £80 million a year by 2017-18, with almost half expected to be achieved in 2015-16.

But that does suggest that the ‘connected world’ spin is just that - a good headline. Some analysts, such as Patrick O’Brien, lead retail analyst at Verdict Research, reckons the IoT line is actually diluting the sense of what he sees as a logical merger:

"Despite both retailers being keen to point to the ‘Connected world’ being one step closer thanks to the merger, in reality, this is a simple and relatively boring cost-cutting exercise, which they are attempting to give a more interesting futuristic sheen.

"However, this does not mean that it is a bad idea. Lower costs mean more flexibility to react to changes in the business environment, and most importantly, more clout to fight the likes of Amazon on pricing.

"Merging the two companies into Dixons Carphone will not result in any significant differences to shoppers. In fact, the only noticeable benefit is that analysis undertaken by the two businesses shows they will achieve £80m of savings each year by 2017/18; a worthy, if not spectacular, reason to merge.”

But while O’Brien might not be convinced about the IoT angle or even the ‘creating a retailer for the digital age’ argument, he can see some benefits from the merger in terms of furthering the digital capabilities of both firms:

“The one undeniable advantage of the merger, apart from cost cutting, will be more choice and locality for picking up click & collect orders. It could be argued that a mutual agreement could have been agreed without the need to merge, but at the very least it is a tangible side benefit, and is a relatively cheap competitive advantage over online pure-play retailers.”

That said, Professor Mark Skilton of Warwick Business School is more convinced. He says:

"The increasing commoditisation of this end of the consumer market in electronics, lifestyle and home appliances is rapidly changing the nature of these products and services.

“Both Dixons and Carphone are facing diminishing demand that this merger is aiming to fix. Buyers and consumers are shifting more and more to online for their product offerings. The old world intermediaries like Dixons and Carphone are offering less value in this digital ecosystem with manufacturers being served increasingly by online marketplaces and branded online stores, that is where they are seeking to build their market share and reach more consumers, not at places like Dixons and Carphone Warehouse.

“There is much to do in the connected world of the ‘internet of things’ if Dixons and Carphone are seriously going to be able to sell this new aggregated value proposition.

“They are moving up the value chain as their old consumer product base is disappearing. The connected home, living room, bedroom or kitchen will depend on Dixons and Carphone's product vendors being able to offer connected bundles that work for consumers.

“Dixons and Carphone are thinking ahead and are right to pursue this strategy, but it will require some deft management skills and product-partner strategies to make this a reality.

“Vendors are increasingly thinking this way to bring a group of products and services together in embedded connected services to consumers, but the IT standards, cyber security and other technical issues may still need to be matured together with the kind of mobile apps and cloud computing website hosting to serve the customers and sellers like Dixons and Carphone.”

Verdict

While I tend to agree with Verdict Research’s O’Brien on this, the IoT spin has succeeded in terms of attracting the mainstream media headlines, with lots of reverential citing of Gartner stats and awed explanations about intelligent fridges and smart fire alarms. I keep expecting Marc Benioff’s intelligent toothbrush to pop up at any minute!

It was less effective on the stock market though. In London, Dixons Retail shares dropped 9.19%, while Carphone Warehouse slipped 7.41%.

Certainly watching the presentation by the management teams of both firms, I was less than convinced that the IoT angle was very much more than a convenient hook upon which to hang this merger, even if the basic theory expounded about connectivity and the new world of online devices was essentially sound.

We might also churlishly note that this is not the first electrical retailer to whom Carphone Warehouse has hitched its wagon. Back in 2008, it had a joint venture with US electronics retail giant Best Buy, boasting that:

“It's unlike any retailing of consumer electronics anyone here has ever seen before."

By 2011, the deal was off and BestBuy had scuttled back the US.

So the world’s first Internet of Things consumer retailer? Hmmmm - let’s revisit this one in the months to come.